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June 3, 2013

In Medicaid Planning, Don’t Surrender Life Insurance—Trade It for LTC Instead

Your clients who are nearing retirement age might often wonder why they bother maintaining the life insurance policies they have funded for years. With children grown, the need to provide for beneficiaries in the event of an untimely death has already been eliminated. Further, these policies are considered assets that can have a significant impact when determining Medicaid eligibility.

Despite this, recent proposals in several states can give older clients a reason to maintain their policies and provide peace of mind in Medicaid planning. Under these proposals, ownership of a life insurance policy can actually help clients in long-term care planning as more state Medicaid offices embrace the use of life settlements in conjunction with Medicaid coverage.

The Proposals

Many clients will eventually need to rely upon Medicaid coverage for long-term care services in a nursing home because Medicare and private health insurance cover only limited long-term care, and traditional long-term care insurance has become prohibitively expensive for many in recent years. Since Medicaid coverage does not kick in until the client spends down assets to below the system-mandated threshold, many would end up surrendering their life insurance policies in order to meet these asset requirements.

To avoid this result, several states have proposed legislation that would use a type of life settlement technique to convert the value of the life insurance contract into a stream of income that must be used to fund long-term care. Florida, for example, would require that the proceeds of the life settlement be held in an irrevocable state or federally insured account with a schedule of payments to provide for long-term care.

Further, Florida’s proposed rule would permit a death benefit equal to the lesser of $5,000, or 5% of the account value, which would be paid to the client’s beneficiaries or estate. Upon the client’s death, if the account schedule called for further long-term care payments, those amounts would be added to the death benefit.

Kentucky’s proposal contains similar provisions but also would require that the face value of the life insurance policy exceed $10,000 before the client could enter into a life settlement with the state.

How to Advise

Even for clients who have been paying into a life insurance policies for years, depending on the type of policy, the surrender value can be significantly less than the eventual death benefit. The life settlement rule in Texas anticipates that clients will be able to realize approximately ten times more than the surrender value by entering into a life settlement with the state to provide long-term care services.

For clients who no longer see the traditional need for life insurance because their children are financially independent, the ability to convert life insurance into long-term care insurance later in life can provide a powerful incentive for maintaining those policies.

Because the proposed rules would require that any amounts remaining in the client’s account with the state be refunded as a death benefit, the client would not lose the funds if they are not eventually needed to cover the cost of long-term care.

Conclusion

Not all clients will need to resort to a life settlement in lieu of surrendering a life insurance policy to qualify for Medicaid’s long-term care coverage. However, those clients who are considering surrendering policies because of a perceived lack of need should be advised of the possibility that those policies could eventually be converted into a form of long-term care insurance without jeopardizing Medicaid eligibility.